How To Improve Cash Flow With Factoring
Companies of all sizes can experience cash flow problems from seasonal slumps and growing pains. Businesses that rely on invoices being paid now instead of the thirty-to-ninety-day window typically given will often turn to factor those accounts receivable for help. This process can be beneficial in several ways when done with the right approach, but that approach will be different for each business and each factoring company.
Understand the Process
Before you decide to work with a factor to ease your cash flow, it is essential to understand how the process works, what you need to do, and how your customers will be impacted. When you factor accounts receivable, you are essentially selling your invoices to a third party who will give you an advance for a percentage of the invoice value. Once the client has paid the factor, you will receive any withheld funds minus a small fee. While this is typically a higher interest rate than a bank loan, the cost is usually less than five percent, your credit is not considered, and the funds are deposited in your account in days.
Choose Invoices Carefully
Factoring is all about getting an advance on the value of your accounts receivable, so choosing which invoices to use will make a big difference in how helpful the process is to your cash flow. Businesses with many small-amount invoices are likely to see less return than those working with a couple of large-ticket accounts because the factor may charge an additional fee for processing each invoice. You should not just grab an enormous outstanding invoice to use, however, because the accounts need to be in good standing, and the creditworthiness of your client will be taken into consideration.
Research Factors Before Signing
The company you work with decides whether your invoices qualify for an advance, how much the fee will be and even how many accounts you can submit. Researching these businesses is the best way to find competitive rates and companies designed to help clients in your industry. For instance, a factor specializing in accounts receivable for the trucking industry may not understand the concerns of your manufacturing or retail company.
One of the resources available to business owners facing cash flow problems is factoring. This process helps you get an advance on the money your customers owe you while still giving clients the whole thirty-to-ninety-day window for payment. Research factor companies and choose the best invoices before you sign up for this service to get the best outcome.